Consequences of a Two-tiered Regulatory Model: Evidence From Audit Fees and Changes in Foreign Private Issuer Status

The U.S. SEC permits exemptions from U.S. domestic securities regulation for foreign-domiciled firms that qualify as foreign private issuers (FPIs). We study the impact on audit fees when foreign-domiciled firms lose or gain FPI status for a plausibly exogenous reason while maintaining their cross-listing status. After losing FPI status, foreign firms must comply with corporate governance, financial statement reporting, and insider trading disclosure requirements of U.S. domestic issuers. We find that FPI status is associated with lower cross-listing costs, as evidenced by significant audit fee increases when firms lose FPI status. Notably, we find that the benefit of FPI status is more pronounced among firms from countries with robust governance standards. Conversely, for firms from countries with weaker governance standards, compliance with U.S. corporate governance requirements correlates with reduced audit fees, offsetting increased audit fees arising from compliance with financial statement requirements and insider information disclosure.